Question

The entry for creating a provision for bad debts is:

• A. Debit provision for bad debts a/c and Credit debtors a/c.
• B. Debit debtors a/c and Credit provision for bad debts a/c.
• C. Debit provision for bad debts a/c and Credit [profit and loss a/c.
• D. Debit profit and loss a/c and Credit provision for bad debts a/c.

Answer 1

The correct option is D Debit profit and loss a/c and Credit provision for bad debts a/c.

The provision for doubtful debts is the estimated amount of bad debts that will arise from accounts receivable that have been issued but not yet collected. It is identical to the allowance for doubtful accounts. The provision is used under accrual basis accounting, so that an expense is recognized for probable bad debts as soon as invoices are issued to customers, rather than waiting several months to find out exactly which invoices turned out to be noncollectable.

Journal entry for creating a provision for bad debts is:

Profit and loss A/c Dr.

To Provisions for bad debts A/c